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April 23, 2019

IRS Provides Update on Voluntary Disclosure Process

IRS

Nardone Limited’s tax attorneys advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign and domestic financial accounts and the importance of reporting previously undisclosed accounts or income. For example, if a taxpayer has a financial interest in, or signature authority over, a foreign financial account, the taxpayer may be required to report the account annually by electronically filing a FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). If a taxpayer fails to follow the Internal Revenue Service (“IRS”) reporting requirements, such as filing the FBAR, and the failure is due to willful behavior, the taxpayer could face potential criminal liability or substantial civil penalties. The IRS, however, has historically offered taxpayers a way to potentially avoid criminal liability by voluntarily disclosing the taxpayer’s willful non-compliance.

Background

On March 26, 2009, the IRS announced its first Offshore Voluntary Disclosure Program (“OVDP”), which offered taxpayers who had undisclosed foreign accounts a pathway to compliance with U.S. tax law. The OVDP was originally created for taxpayers with exposure to potential criminal liability and substantial civil penalties due to a willful failure to report foreign financial assets and to pay the tax due on those assets. The first OVDP ran through October 15, 2009. The IRS then announced a second OVDP, which ran through September 9, 2011. On January 9, 2012, the IRS reopened the OVDP, which remained in effect until September 28, 2018. While the OVDP is no longer in effect, the IRS established a new voluntary disclosure procedure, which may provide non-compliant taxpayers relief from criminal liability.  

Nardone Limited Comment: It should be noted that the Streamlined Filing Compliance Procedures (“SFCP”) are still available for taxpayers whose behavior is not due to willful non-compliance. If you are unsure whether your non-compliance is due to willful or non-willful behavior, it is important that you contact an attorney who is experienced in communicating with the IRS. For more information on the SFCP, or what the government considers to be willful behavior, see our previous blog article.

The Updated Voluntary Disclosure Practice

On November 20, 2018 the IRS released a memorandum to taxpayers, detailing the new process for voluntarily disclosing violations due to willful behavior. The new program titled the “Updated Voluntary Disclosure Practice” (“UVDP”), applies to both domestic and offshore matters, whereas the OVDP only applied to undisclosed offshore accounts. The purpose of the UVDP is to provide taxpayers—who are concerned that their conduct is willful or fraudulent—a way to come into compliance with the law and avoid potential criminal prosecution. The IRS set out the following procedures regarding the UVDP.

The IRS has indicated that Criminal Investigation (“CI”) will screen all voluntary disclosure requests to determine whether the taxpayer is eligible to make a voluntary disclosure. To be eligible to make a voluntary disclosure, taxpayers are required to submit a preclearance request on Form 14457. The form must be submitted to CI via fax or mail. If CI accepts the taxpayer’s preclearance, the taxpayer must promptly submit to CI all required voluntary disclosure documents using Form 14457. This form requires the taxpayer to submit information related to the taxpayer’s non-compliance. If CI accepts the taxpayer’s voluntary disclosure, it will send a preliminary acceptance letter to the taxpayer. CI will then send the letter and attachments to the IRS’ Large Business & International (“LB&I”) division in Austin, Texas for case preparation before examination. Once received by LB&I, the IRS will not require the taxpayer to submit any additional information or documentation to the Austin unit. The LB&I Austin unit then forwards cases for case building and field assignment to the appropriate Business Operating Division and Exam function for civil examination. Examiners within LB&I will develop the case, use appropriate information gathering tools, and determine the taxpayer’s liability and applicable penalties.

When speaking with the IRS about the taxpayer’s non-compliance, it is imperative that the taxpayer answer truthfully, timely, and completely. The taxpayer must show a willingness to cooperate, or the IRS will not consider the disclosure to be voluntary. As part of that cooperation, the IRS expects that voluntary disclosures be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. I.R.M. 9.5.11.9.4. If a taxpayer fails to cooperate, the examiner may request that CI revoke the preliminary acceptance. Thus, it is important that taxpayers ensure that they are timely replying to the IRS and that they are making arrangements, in advance, to pay off their delinquent taxes.   

Conclusion

We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their foreign or domestic financial accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported financial accounts or income. But, taxpayers must be diligent when it comes to communicating with the IRS. That is why it is important to seek help from an attorney who has vast experience representing taxpayers before the IRS. Ultimately, if you are concerned that your failure to report income or pay tax is due to willful conduct, we encourage you to contact Nardone Limited at 614-223-0123 to discuss your options.  

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April 23, 2019

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